You might remember Cuba Gooding Jr.’s immortal line from the movie Jerry Maguire, “Show me the money!”
That’s what financial statements do for investors – show the money that companies earn, own, and owe.
These statements appear in a company’s annual report, and are broadly classified into three categories:
- Balance Sheet
- Profit & Loss Account
- Cash Flow Statement
Over the next few weeks, we will discuss these key financial statements that companies use to communicate their performance with investors, and how you can use them to identify the best long-term investment opportunities.
Let’s start with the Balance Sheet, also known as the ‘Statement of Financial Position’ of a company.
The Balance Sheet explained…
A Balance Sheet offers a snapshot of a company’s health.
It tells you how much a company owns (assets), and how much it owes (liabilities). The difference between what it owns and what it owes is its “equity”, also commonly called “net assets” or “shareholders equity”.
A balance sheet shows how a company stands at a given moment. There is no such thing as a balance sheet covering the year 2010. It can only be for a single date, for example, March 31, 2010.
Here is a small video I’ve prepared to help you with a basic understanding of the Balance Sheet.
If you can’t view the video above, click here to view. And, by the way, don’t forget to turn on your speakers.
I will follow up on this video with more sessions on explaining the various aspects of the Balance Sheet and how it is such an important statement for you – the investor.
In the meanwhile, after seeing the above video, if you have any question on the basics of a Balance Sheet, just post the same in the Comments section below and I’ll try to answer it.
Anyways, you might ask – “Is there a way I can invest in stocks without understanding financial statements or a balance sheet?”
Of course, there’s a way. But it’s very much like climbing Mount Everest without knowing mountaineering.
You might still reach the peak, but the chances are miniscule.
You know that, don’t you?